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Reforming the Congressional Budget Process

Mr. Chairman, thank you for the opportunity to offer my views on
the imperative of budget process reform in the 104th Congress. It
is my conclusion that the process by which we make budget decisions
in Washington—the rules of the game—can substantially determine
budget outcomes. The rules matter. A fundamental imbalance exists
in the current rules. For more than twenty years, forces that favor
spending have consistently prevailed over forces that favor fiscal
restraint.

Earlier this year I authored a booklet entitled: “Government:
America’s Number 1 Growth Industry.” Regrettably, that is exactly
what the federal enterprise has become—our fastest growing
industry. I attach for the record a chapter of that book on the
loss of control of federal spending.

How do we put an end to the pro-spending bias in our budget
rules? A top priority for this Congress should be the enactment of
a new budget act. The 1974 Budget Reform and Impoundment Control
Act is a failure. One of the purposes of the 1974 Budget Act was to
eliminate deficit spending. But here is the actual legacy of that
legislation: in the twenty years prior to the Budget Act, the
budget deficit averaged just 1 percent of GDP and $30 billion in
1994 dollars. In the twenty years since the enactment of the 1974
Act, the average budget deficit has been $170 billion per year, and
3.5 percent of GDP. We have accumulated more than $4 trillion of
debt since 1976. By any objective standard, the budget process has
not worked better under the 1974 act—it has worked much worse.

The 1974 Budget Act cannot be fixed. Tinkering won’t do the job.
The 104th Congress ought to repeal the act before it does more
damage to our national economy.

What should be the key components of a new budget act?

The centerpiece of any budget reform quite clearly is an
amendment to the Constitution outlawing deficit spending. Most
everyone on this Committee is keenly aware of the need for a
balanced budget requirement, so I will not long dwell on the
subject. Deficit spending is an unconscionable form of fiscal child
abuse.

There are hundreds of groups in Washington that pretend to speak
for the interests of children. But who in Washington, among the
thousands of powerful special interest lobbyists and
self-proclaimed do-gooders, speaks for the children who are going
to have to pay off our irresponsible debts today? The single most
pro-child policy that any of us can pursue in Washington today is
to reduce the crushing burden of debt our government is now
preparing to place on the next generation’s backs.

I sincerely wish that we did not need a constitutional amendment
to solve Washington’s addiction to red ink. Unfortunately, the
destruction of our nation’s once firmly held moral rule against
deficit spending requires us to amend out Constitution and command
Congress to do what it used to feel honor-bound to do—that is,
balance the budget.

The argument is made by tax and spend opponents of the BBA that
a constitutional requirement is just “a gimmick.” No one really
believes this. If the amendment were a gimmick, Congress would have
approved it long ago. The reason that defense contractors,
corporate lobbyists, federal workers, teachers unions, the welfare
industry and other powerful special interests groups ferociously
attacked the BBA is not because they think it won’t work, but
because they shudder at the thought that it will. What frightens
the predator economy in Washington is that gift- bearing
politicians may have the federal credit card taken away from
them.

The U.S. House of Representatives earlier this year wisely
approved the BBA. The matter now lies outside of your hands. The
real issue is: What can be done in the meantime to make the budget
process work better and to end deficit spending?

The House has passed a courageous budget resolution crafted by
Budget Committee Chairman John Kasich which promises a balanced
budget by 2002. But one thing is a virtual certainty: no matter how
sincere your intentions of balancing the budget, the deficit will
not be eliminated by 2002 unless new budget enforcement rules are
implemented to ensure that this admirable goal is honored.

Here are the components of a new budget act that I would urge in
order of priority:

An Enforceable Legislative Balanced Budget Requirement

Don’t wait for a balanced budget amendment. Act now. The most
urgent reform for this Congress is to pass a legislative balanced
budget law that enforces the deficit targets established in the
House Budget Resolution.

What I have in mind is a new Gramm-Rudman formula that
establishes iron-clad enforceable deficit targets. One of the great
myths in Washington is that Gramm-Rudman was repealed because it
wasn’t working. Gramm-Rudman was repealed by the pro- spending
constituencies in Congress precisely because it was working too
well.

Gramm Rudman was enacted in 1985, when Congress was under
intense public pressure to immediately reform the budget and reduce
the $200 billion budget deficit. The controversial law required
Congress to balance the budget by 1991 by meeting a series of
annual deficit reduction targets. If Congress missed these targets,
the law would trigger automatic spending cuts—a process called
“sequestration”—to reduce the deficit to the mandated level.

Critics charge that the act was a blunderous failure because
Congress continually veered off the GRH balanced budget track. It
is true that Congress routinely missed the deficit targets. Actual
deficits under GRH were on average about $30 billion per year above
maximum deficit targets.

Still, Gramm Rudman had a positive effect on the federal budget.
The best way to measure this impact is to compare the actual
deficits recorded under the five years of GRH with what the deficit
was projected to be by the Congressional Budget Office (CBO)
without the law. The 1989 deficit was about $100 billion lower than
it was expected to be in 1985 without Gramm Rudman. In fact, the
Gramm-Rudman era, 1986-1989, was the only period of genuine deficit
reduction in nearly twenty years. The deficit fell from 6 to 3
percent of GDP over this period.

The most dramatic effect of Gramm-Rudman was to curb government
expenditures. Government spending in the five years prior to GRH
grew at a rate of 8.7 percent, but slowed to only 3.2 percent in
the five years it was in effect. Even entitlement spending was
curtailed under GRH to a 5 percent growth rate, because Congress
realized that if they allowed programs like Medicare and Medicaid
to rise uncontrollably, they would eat up the rest of the budget
and cause painful automatic cuts in discretionary spending.

Senator Gramm and Majority Leader Dick Armey have introduced
legislation to restore many of the features of the old Gramm-
Rudman. The most vital reform is a series of deficit reduction
targets, that if missed invoke automatic across the board spending
cuts— a sequester. I would urge that any new sequester process
include all federal outlays except interest payments and Social
Security benefits.

This will impose a much-needed dose of discipline into the
budget process.

A Supermajority Requirement to Raise Taxes

Americans have been hit with twelve tax hikes in the past twenty
years: each one has succeeded in further expanding the size of
government, rather than reducing the debt. Requiring a three-fifths
or two-thirds majority in both the House and Senate to pass a tax
increase would allow Congress to pass tax hikes in cases of
national emergency, but would make it very difficult for Uncle Sam
to continue its annual ritual of peacetime tax hikes.

Several states, including Arizona, California, and Oklahoma,
have enacted such measures; they have stopped tax increases dead in
their tracks. As one Arizona taxpayer advocate of the supermajority
requirement recently told me: “Now the legislature doesn’t even
bother to propose new taxes.”

The Contract with America established new rules requiring a 60
percent vote to raise income taxes. This was a good start. But now
this hurdle should be made to apply to all revenue raising
bills.

National Referendum on all tax increases.

Another populist budget reform that is sweeping through the
states is the requirement that any tax increase must be ratified by
a popular vote of the people in the next election. This gives the
taxpayers veto power over the state legislature’s efforts to raise
taxes. Congress should be forced to take its case to the people,
when it wants to take more dollars out of our paychecks. It is a
virtual certainty that George Bush and Bill Clinton’s wildly
unpopular record tax increases would have been blocked if this rule
had been in effect.

Minority leader Dick Gephardt deserves hearty congratulations
for suggesting this reform as part of his 10 percent tax plan.
Perhaps a bipartisan consensus could emerge on this issue.

Dynamic scoring of tax law changes

The 1986 capital gains tax rate increase has raised roughly $100
billion of less revenue than the Joint Tax Committee estimated when
the law was enacted. Capital gains realizations are less than half
the level expected. Why these gigantic forecasting errors? Congress
still uses static analysis to score tax rate changes—a scoring
technique that assumes little change in behavior to tax changes and
almost no overall economic impact of new tax laws. The assumptions
have been shown time and again to be wrong. We know the procedures
are wrong. But we still use them.

This has negative policy consequences. The capital gains tax cut
in the Contract with America will almost certainly raise revenues
for the government—and the cap gains cut may raise substantial new
revenues. The rich will pay more taxes with the rate cut. But the
Joint Tax Committee refuses to score these dynamic effects. Rep.
David Dreier has introduced legislation calling for a zero capital
gains tax—something the Cato Institute has long endorsed. But the
static revenue estimators say this will reduce revenues by $150
billion over five years. Dynamic estimates indicate that a zero
capital gains tax will so energize our economy that total tax
revenues may actually increase if the capital gains tax is
eliminated. But as long as we are slaves to static scoring, Mr.
Dreier’s much-needed legislation will never be approved.

This provision is obvious. The President should have the power
to cut out the waste that Congress won’t. A recent Cato Institute
survey of current and former governors finds that more than 80
percent believe the President should be given this authority. One
of most negative consequences of the 1974 Budget Act was to strip
the President of his legitimate impoundment powers—a power that
had been exercised by every President from Thomas Jefferson to
Richard Nixon. Line item veto would be a partial restoration of the
presidency’s legitimate powers over the purse strings.

An end to baseline budgeting.

When the School Lunch Program is going to increase by 4.5
percent per year, that is a budget increase, not a budget “cut.”
Baseline budgeting is a fraud. Lee Iaccoca once stated that if
business used baseline budgeting the way Congress does, “they’d
throw us in jail.”

It’s time to end the false and misleading advertizing in the
budget. Congress should be required to use this year’s actual
spending total as the baseline for the next year’s budget. If we
spend more than the current year, we are increasing the budget, if
we spend less, we are cutting it.

A statute of limitation on all spending programs It has been
said that the closest thing to immortality on this earth is a
federal government program. Congress doesn’t know how to end
programs—even years and years after their mission has been
accomplished. (Hopefully, this Congress will prove this statement
wrong!) A five-year sunset provision should apply to every spending
program in the budget—entitlements and discretionary programs.
This would require the true “reinvention” of programs by forcing
the re-examination of every program including entitlements, every
five years.

Debt-buy down provision

This is Rep.Bob Walker’s idea of empowering taxpayers to
dedicate up to 10 percent of their income tax payments to
retirement of the national debt. Politicians earmark spending all
the time. Taxpayers should have that same right.

THE BUDGET STAMPS SOLUTION

Most of the above ideas are standard—though long overdue budget
reforms. I would also like to suggest one other less conventional
budget process change. In fact, this is much more radical than
anything tried to date to conquer the budget deficit. I borrow the
concept from former Reagan administration economist John
Rutledge.

If the balanced-budget amendment remains stalled, why not
control the cash flow directly? Under the Rutledge plan, the
government would issue a special blue currency called “budget
stamps” that would be issued to all recipients of federal
spending—much in the way that food stamps are issued to the poor.
The recipients would redeem these blue dollars for greenbacks at
the local bank or post office. Here’s the catch: if the federal
government balanced the budget, a budget stamp would be worth one
dollar. But if Congress spent twice as much as it collected in
taxes, a budget stamp would be redeemable for just 50 cents.

This year the federal government would issue 1.6 trillion
dollars of budget stamps. Those budget stamps would have a total
worth of $1.4 trillion—the amount of money collected in taxes.
Hence, each blue budget buck would be worth roughly 87 cents. Each
day the federal Treasury would report to banks and Post Offices how
much budget stamps are worth, depending on how many stamps had been
issued and how much revenue had been collected. In this way, total
cash outlays would exactly match tax revenue inflow.

Budget stamps would force the constituents of federal largesse
to compete against each other at the budget table. Each dollar
allocated to farmers would be one dollar less for welfare
recipients, social security beneficiaries, defense contractors,
bilingual education teachers, subsidized artists, and so forth.

Deficits would be impossible, since the government under the new
budget process would be incapable of spending more than it took in.
And finally, because Congress’s salaries (and staff’s) would be
paid in budget stamps, Newt Gingrich, Dick Gephardt, Bob Dole and
every member of this Committee would have a strong financial
self-interest in limiting spending.

I am convinced that Rutledge is on to something. The budget
stamp idea is one that the recipients of government largesse will
hate, but taxpayers will love. Fortunately, there are still a few
more of the latter than the former.